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Inflation Blame Game: Whose Fault Is This Really?
There's no shortage of debate around the relative wisdom of deploying draconian rate hikes to combat
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1/3 of 8.6%=2.9% Fed target is 2%. So to get to 2%, you will need to see headline at 6%. Lets be generous to the Muhammed’s and Larry’s of the world and say it is a bit more like 40%. If you buy the SF fed’s argument which I do, it means that Powell needs to get to 5% headline and the rest will gradually wash out in the next couple of years. Does anyone believe that the Fed cannot do this by tighening policy? Frankly I am so tired of folks blaming the FOMC. Sure they reacted late- but it was by no means by measured in YEARS. You can fairly tag them with being somewhat late. How many forecast a Russian invasion or China lockdown this year in mid 2021? There is plenty of blame to go around. I give the FOMC 20% of the blame MAX. And if they are not careful they can easily cause a pretty significant recession- disinflation can easily go to deflation.
I think of the current inflation as roughly equal parts domestic (fiscal and monetary stimulus) and foreign (food, energy, global supply chain). Which isn’t too different from Shapiro’s conclusion (maybe he’s self-interested, I am AFAIK not).
The Fed can certainly crush demand enough to suppress the domestic part, which might translate to CPI going from 8+% to 4-5%. Making domestic bear the whole burden will mean a lot of economic pain to the lowest income, and some to middle/high income as well. Don’t look for Congress to do anything to cushion the hit. I expected no action from Congress in a mid-term year, and that certainly seems like the case.
The alternative is for the Fed to have a little patience, don’t press quite as hard on the domestic part, and see if the foreign part will ease. It should, partly because the fundamentals will ease (China can relax zero-Covid after Xi’s position is secure, Ukraine’s grain will find another route to market, production will respond somewhat) and partly because the financial speculation in the relevant commodities will ease as the fast profits are made.
Will the Fed have that patience? They don’t sound like it, economic deterioration may yet convince them but their data-dependent approach means the econ data will have to be very clearly bad to have that effect.
For now, assume Fed is full speed ahead and damn the torpedos through, my guess, at least end of summer.